"On January 3, 2011, F&M International Ltd. acquired a tract of land just outside the city limits. The land and existing building were purchased for $2.4 million. F&M International Ltd paid $400,000 and signed a no interest-bearing note requiring the company to pay the remaining $2,000,000 on December 31, 2012.
Present value of note payment is as follows:
PV = $2,000,000 (.87344*) = $1,746,880. An interest rate of 7% properly reflects the time value of money for this type of loan agreement. Transfer taxes, title insurance and other costs totaling $24,000 were paid at closing.
During February, the old building was demolished at a cost of $120,000, and an additional $100,000 was paid to clear and grade the land. Construction of a new building began on March 1 and was completed on October 30. Construction expenditures were as follows:
March 30 ----------------------------$800,000
June 30-------------------------------1,200,000
July 30-------------------------------1,200,000
September 1---------------------------600,000
F&M International Ltd. did not borrow particularly for the construction project, but did have the following debt outstanding throughout 2011:
$6,000,000, 8% long-term note payable
$2,000,000, 5% long-term note payable
In December, the company purchased equipment and office furniture and fixtures for a lump-sum price of $800,000. The fair values of the equipment and the furniture and fixtures were $540,000 and $360,000, respectively. In December, F&M International Ltd. paid $340,000 for the construction of parking lots and landscaping.
Required:
1. Determine the initial values of the various assets (Land, building, improvements, furniture .etc.) that F&M International Ltd. acquired or constructed during 2011.
2. How much interest expenses will F&M International Ltd. report in its 2011 income statement?